49571 building investment portfolios


Published on

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

49571 building investment portfolios

  1. 1. 49559 A4 20 CMYK JUN 10 DC 21 06 10 DC 29 06 10 DC 06 07 10 DC 08 08 10 DC 12 07 10 DC 19 07 10 DC 19 07 102 DC 19 07 103 Retirement Account Offering Income Drawdown with more choice Portfolio Planning Retirement Account The Personal Pension with more choice For professional adviser use only, not to be relied upon by any other person.
  2. 2. 1 The Retirement Income feature of our Retirement Account offers your clients income drawdown. Retirement Income has a competitive range of investment options, clear unbundled charges and flexible remuneration. With income drawdown, the value of your clients Account remains invested. You can choose from a wide range of investment options and take an active role in the management of your clients Account until the age of 75. This can allow a client’s Account to benefit from potential investment growth. However, the value of investments can go down as well as up, so the value of your client’s Account could reduce, even if your client takes no pension income. This means that, depending on how investments perform, the annuity income your client can eventually buy may be more or less than that available now. The total amount of income a client can draw from income drawdown may also be less than the total income available from an annuity over the same period.
  3. 3. 2 me r ments on income. may be more o be less Different types of risk Anyone investing in the Scottish Widows Retirement Account for income drawdown, is accepting significant risks. Income expectations before annuity purchase may not be realised because the level originally chosen was unsustainable or because investments have preformed less well than hoped. In addition, if an annuity is eventually bought with the remaining fund there are further risks caused by interest rate and mortality trends. Income risk One of the key decisions that must be made with income drawdown is what level of income is appropriate for the client. If the level is set too low, the client may end up needlessly economising and end up with less income over their lifetime than they could have had. On the other hand, if the income level is set too high there is a danger that it may subsequently have to be reduced. Given the risks associated with income drawdown, it is usually best to set income below the maximum allowed. This means that if things do not go according to plan it may still be possible to maintain the initial income level. The level of income chosen is a matter for an adviser and client to discuss. Mortality Drag Mortality affects clients with income drawdown in two ways. The first is that, while tax treatment may be more favourable if using drawdown rather than annuity purchase, by delaying the purchase of an annuity the client will lose out on the cross-subsidy in annuities for those who die relatively early to those who live for a very long time. The second effect is that if annuity rates generally worsen because of changes to mortality assumptions, your client could lose out when they come to purchase an annuity. Interest Rate Risk Another major risk is that annuity rates may be worse at the end of income drawdown because long-term interest rates are low. This has been a real issue for many already in income drawdown. Investment Risk The ability to remain actively invested is a key benefit of income drawdown, particularly when annuity rates are low. There are two main investment risks, one caused by a stock market crash or slump and the other by systematic under-achievement. In most cases, income drawdown will be invested in equities and similar assets that give the prospect of good long-term growth but are volatile from year to year. While good and bad years may balance out over the long term, this is clearly not guaranteed, and poor returns early on can have a serious detrimental effect.
  4. 4. 3 Investment options used within Income Drawdown Portfolio Planning Income Drawdown The concept of portfolio planning for income drawdown can be different from other long term investments such as retirement planning. The key difference for Retirement Account – Income Drawdown is that income can be taken out of the plan at any time from age 55 in the form of income drawdown. You will also know the amount of income drawdown that can be taken out of the plan. If funds are being used for income drawdown investment returns may not be sufficient to provide a final value to purchase an annuity. If too much income is drawn from the fund in comparison to the investment growth of the fund then there may not be any fund left when your client decides to purchase an annuity, normally before age 75. Some of the main factors you and your client will discuss are: • Your client’s attitude to risk • Your client’s investment objective • Income requirements • Select individual funds/Asset allocation • Ongoing income and investment reviews. Attitude to Risk Retirement Account – income drawdown carriers a higher risk than an annuity. The client is giving up the option of a guaranteed income from an annuity, and is likely to want to invest in a way that will give a good prospect of matching that income over the longer term. That suggests that the investment approach should not be too cautious because it has to compensate for higher charges and mortality drag. Many clients become more cautious as they grow older, and may be less happy to accept the volatility of stock market investments than when they were younger. There is also a shorter period to recover from any downturns, assuming an annuity is likely to be bought by age 75. This will depend on the age the client’s go into income drawdown. If they go in at 55 they have 20 years, If they go in at 70 they have 5. The pension fund remains invested and can fall as well as rise in value and be lower than illustrated. Your client could potentially receive less pension income than they expected Investment Objective All investment portfolios must have an investment objective and growth objective agreed with the client from outset. These factors can be used against measuring the actual performance of the pension fund(s) on a regular basis. Where your client decides to take pension income the highest priority is to provide the income that the client is expecting to receive from income drawdown. Growth will be the main aim of these investment portfolios
  5. 5. 4 own ch any time for income h income ft when ay that will ch should market ming If they could outset. s expecting Tools Critical Yields are one of the most useful numeric tools when giving advice on income drawdown. Their immediate purpose is help with assessing the viability of income drawdown but their usefulness goes beyond that. Once a Critical Yield is known from your client’s income drawdown illustration it can be used to set a target for the investment growth required from that investment portfolio. CRITICAL YIELD A – The rate of return required to match the annuity that could have been purchased at outset, assuming annuity rates are unchanged. CRITICAL YIELD B – The rate of return required to maintain a selected level of income. Portfolio Architect Retirement Account – Income Drawdown is web based giving you and your client control to process all activities on line. Scottish Widows Portfolio Architect allows you to assess your client’s attitude to risk and create a suitable portfolio of pension funds to invest in. The Scottish Widows risk profiling tool operates by asking the client a series of questions. Those answers are used to provide a risk and reward profile on a varying scale depending on the answers given to those questions. Scottish Widows Portfolio Architect will then use this information to measure the client’s attitude to risk and assist you in building an investment portfolio for your client. Asset Allocation Diversification is an important part of an investment strategy. Deciding which asset classes to invest in e.g. bonds, property, european or global equities will be a key factor to achieving this. Different investment sectors perform well at different times. Investment performance can be linked to asset allocation rather than just picking top performing pension funds or an in favour investment fund manager. Selecting a suitable portfolio of assets is therefore a major part of your investment advice process. There is no guarantee that in selecting a portfolio of pension funds that the growth and income objectives will be met. By selecting a diverse investment strategy it is possible to aim for growth and manage your client’s level of risk. This will allow you to build a stronger relationship with your client and provide "embedded" value to your business over the long term.
  6. 6. 5 Evaluating Risk While there are a number of ways to evaluate risk, Scottish Widows use various definitions to help you decide on the appropriate investment approach for your client. For more information please see Investing with confidence Investment Guide SW70001 or visit our website www.scottishwidows.co.uk/investmentapproaches Please be aware that we review the investment approach definitions and the investment approach for the funds regularly, so these may change. The value of an investment is not guaranteed and can go up and down depending on investment performance (and currency exchange rates where a fund invests overseas). These options may be acceptable depending on a client’s individual circumstance. It is essential that all elements are clearly explained and documented with the client. Volatility Advising a client on a diverse portfolio of investments you need to consider the volatility of the investments chosen. Clients may find it unacceptable to see the value of their pension fund fall and rise on a regular basis if their risk appetite is low. Clients who have a short term until they plan to buy an annuity will be most affected by high volatility when investing in certain pension funds. If the value of their portfolio falls they may not be able to wait until the market recovers before having to purchase an annuity. If the time frame is longer they will be able to absorb periods of negative performance. This could make income drawdown unsuitable for some clients even if the Critical Yield is met by the assumptions of the asset allocation. Investment term of the plan Where a client is taking income drawdown they may be affected by time considerations. These may not have been applicable during the retirement planning stage. You and your client will need to look at the term before an annuity is purchased. Short Term up to 5 years: These investments are where the initial income drawdown will come from. They may need to be in safe investments to ensure that the income drawdown is paid Medium Term 5-10 years: Investments can be invested in a wider portfolio of pension funds within a client’s risk appetite including certain equities. Other pension funds may be kept more liquid to ensure income drawdown payments are maintained. Long Term Over 10 years – These investments give you and your client the option to invest in a wide choice of investment portfolios and asset classes with the aim of higher returns which are associated with equity exposure. More liquid investment funds sit alongside to ensure the income drawdown payments are maintained.
  7. 7. 6 ence s regularly, osen. k vesting rs before mance. ons een nuity need s risk wn investment id Market Correlation Within a portfolio a broad range of different assets will be held to manage your client’s investment risk. Different assets perform differently in any given market. It is possible to create a portfolio that minimises potential losses in different market conditions. Market Co Within a portfo perform differe market conditio For example, UK performer in 20 The below table Highest performance Lowest performance Sources: Datast The figures refe From your clien some form of in overseas equitie 6.9 6.3 7.1 7.6 5.6 6.3 5.1 4.1 3.8 4.7 4.8 4.9 6.2 5.7 1.2Cash Percentage returns of asset classes in each calendar year from 1995 to 2009 2nd Best Performing 5th Best Performing Worst Performing4th Best Performing3rd Best Performing Sources Overseas Equities: FTSE World ex UK Index (Source: Thomson Datastream, Total Return in Sterling Terms). UK Equities: FTSE All Share Index (Source: Thomson Datastream, Total Return in Sterling Terms). UK Property: UK IPD All Property Index (Source: Thomson Datastream, Total Return in Sterling Terms). UK Gilts: FTA British Government Fixed All Stocks Index (Source: Thomson Datastream, Total Return in Sterling Terms). Commodities: S&P GSCI Commodity Index (Source: Thomson Datastream, Total Return in Sterling Terms). Cash: UK Interbank 3 Month Index (Source: Thomson Datastream, Total Return in Sterling Terms). Performance is measured from 1 January to 31 December each year. The figures refer to the past and past performance is not a reliable indicator of future results. From your client’s income drawdown illustration if the Critical Yield A is above 2%* p.a then the client will have to take some form of investment risk to achieve their goals. This will involve investing in UK equities or in some circumstances overseas equities. This is highlighted using the 2009 figures in the above table. 20.1 1.4 19.3 22.3 31.2 -4.1 -14.0 -27.4 20.7 7.8 24.9 5.7 9.7 -17.1 18.9 23.8 16.7 23.6 13.8 24.2 -5.9 -13.3 -22.7 20.9 12.8 22.0 16.7 5.3 -29.9 30.1 3.2 9.4 15.4 12.2 14.1 10.5 7.1 10.4 11.2 18.9 18.8 18.1 -5.5 -22.5 2.2 16.4 7.3 14.1 18.9 -0.9 8.8 3.0 9.3 2.1 6.6 7.9 0.7 5.3 12.8 -1.2 21.3 21.5 -10.6 -36.5 45.5 61.6 -30.1 19.4 8.6 9.4 40.4 -25.5 30.4 -25.9 1.0 Overseas Equities UK Equities UK Property UK Gilts Commodities Key 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Best Performing
  8. 8. 7 Individual Fund Selection Once you and your client have decided on an overall approach you can choose individual pension funds to create the required asset allocation. You may consider factors such as how well a manager has done in certain market conditions. Looking at pension funds stated objectives and how well it has performed to those objectives. For more information on the pension funds offered by Scottish Widows please visit our website http://www.scottishwidows.co.uk/extranet/funds or Pension Funds – Investor’s Guide 16540. We may change the selection of pension funds that we make available. Please be aware that the definitions or investment approach rating for specific funds may change in the future. Portfolio Funds With a comprehensive range of funds from ready-made investment portfolios to specialist funds, Scottish Widows has a wide choice of funds to match different investment needs Scottish Widows Retirement Account provides direct access to four portfolio funds. These pension funds can be linked to your client’s risk and reward appetite and form part of diverse investment portfolio. • Cautious Portfolio • Balanced Portfolio • Progressive Portfolio • Opportunities Portfolio These pension funds aim to achieve long-term growth by investing in multi – manager funds. These invest mainly in UK and overseas markets. The multi manager funds are provided by Scottish Widows Investment Partnership (SWIP). These pension funds have regular portfolio reviews and rebalancing. Solution Funds The Scottish Widows Solution funds are a range of seven fund of funds. All the funds are risk rated according to the Scottish Widows Investment Approaches with the Defensive Solution fund at the lower end of the risk spectrum up to the Adventurous Solution at the higher end. These funds will provide exposure to a wide range of asset classes, including collective investment schemes which may themselves invest in a range of other assets. The funds assets are likely to vary from time to time but each category of assets has individual risks associated with them. The value of each of these Solution funds will depend on the combined performance of all of the assets held by the fund. A rise in the value of one asset class may not result in an increase in the fund’s value. Similarly, a fall in the value of one asset class may not result in a fall in the value of the fund. • Defensive Solution • Cautious Solution • Discovery Solution • Balanced Solution • Strategic Solution • Dynamic Solution • Adventurous Solution
  9. 9. 8 create conditions. investment ows e linked nly s have Scottish dventurous lective from time on funds class a fall The Portfolio Trading Service (PTS) The Retirement Account Portfolio trading Service (PTS) has been introduced to help facilitate portfolio based operating models. The PTS can allow you to invest your client’s income drawdown funds in a number of investment portfolios consisting of pension funds from our Scottish Widows Pension Fund and Fund Supermarket ranges. The PTS will allow you to set up new portfolios for new and existing clients and allow rebalancing for clients in existing portfolios. Lifestyling The practice of lifestyling – moving to less volatile investments as retirement approaches – is quite common before retirement, whether on a pre-programmed basis or through active advice as retirement approaches. For income drawdown you and your clients may have different investment approaches than the ones used for retirement planning. You will have regular reviews with your clients throughout the term of the income drawdown. Once these reviews are complete you and your client can make the changes required. Scottish Widows Retirement Account provides you and your client the facility to switch funds free of charge. We may change our charges in the future Pension Fund Charges Your client’s illustration will show the fund charges applying to the pension funds chosen at outset. Some external pension funds carry higher charges relative to those available through Scottish Widows range of funds. This could affect Critical Yield and Reduction in Yield figures which show the deductions that cover the charges, including cost of advice, expenses, profit and any other adjustments that effect illustrated investment growth. Income Drawdown Strategy Scottish Widows Retirement Account allows your clients to withdraw income drawdown proportionally if they are invested in the Scottish Widows Pension Funds. Where your client invests in a range of pension funds other than the Scottish Widows Pension Funds income is paid from the Control Account. Horizontal encashment via Scottish Widows Pension Funds has the advantage of leaving the profile of the portfolio as a whole unchanged by income drawdown withdrawals. This is achieved by cancelling units across all pension funds in the same proportion as the original investment. Taking income drawdown from the Control Account can be used as part of the rebalancing process or hold cash balances in the short term. Storing Income Drawdown Another way of preparing for income drawdown withdrawals is to put an allocated amount to cover a pre determined number of months worth of income in the Control Account where income drawdown can be taken from. The amount held in the Control Account should be reviewed on a regular basis to ensure there is a sufficient amount to pay income drawdown. This can also be used to provide a solution for cash balances in the short term or form part of an investment portfolio.
  10. 10. 9 Reviewing and Rebalancing An investment portfolio will contain a mixture of different types of assets classes and pension funds. Over time if this is left unchecked then the portfolio may become over/under exposed to some assets held. It is likely over the longer term that higher risk parts of the portfolio will out perform lower risk elements. This will increase the equity portion and the overall risk profile of the portfolio. This could affect the client’s risk & reward appetite as a more cautious investment approach will be required before annuity purchase. Regular review & rebalancing helps monitor the client’s objectives, risk and reward appetite and time frame to purchasing an annuity. You and your client’s will have the opportunity to choose the most suitable asset allocation for your client’s investment portfolio. By comparing your new portfolio and existing one you can make the relevant changes to bring your client’s portfolio in line with their current aims and objectives.
  11. 11. 10 if this is left ll increase e as a more purchasing client’s rtfolio
  12. 12. As part of the Lloyds Banking Group, Scottish Widows is proud to be an Official Provider of the London 2012 Olympic and Paralympic Games. Scottish Widows plc. Registered in Scotland No. 199549. Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: 0131 655 6000. Scottish Widows plc is authorised and regulated by the Financial Services Authority. Our FSA Register number is 191517. 49571 06/10